MediaTek, founded in 1997 and listed on TWSE in 2001 with headquarters in Hsinchu Taiwan, primarily conducts its operations in the chipset solutions sector, thus being a vital component for mobile devices, smart home, IoT, wearable, and automotive applications. With sales and research teams across the globe, and total employ count of over 19,000, the company has a strong presence in the industry and is the fifth largest fabless semiconductor company, supporting c.2bn devices annually with their chips. MediaTek is primarily export-oriented, having generated 94% in sales through exports in FY23, and registered 6% in domestic sales.

Positive outlook on the horizon

The company with its diverse use cases for the products, aims to use its technologies to support a wide range of AI-capable edge computing devices such as smartphones, laptops, and tablet among others. MediaTek also plans to execute the enterprise ASIC strategy on the cloud front, which would prove to be beneficial in the long run. Moreover, the company anticipates a rise in revenues in the mobile segment with the ramp-up of Dimensity 9400, a flagship 3-nanometer SoC designed for high-performance and AI applications.

On the automotive front, the company managed to secure new projects with leading Chinese auto manufacturers, thus highlighting an encouraging outlook. With collaboration becoming an important element to secure growth going forward, the company has understood the importance of their relationship with TSMC, thus potentially leading to advanced packaging collaboration and capacity requirements useful for the long run.

Positive top-line trajectory

The company delivered a CAGR of 8.2% in revenues over the period FY14-FY23 to reach NTD433bn. The operating income demonstrated a slower pace of growth, clocking a CAGR of 4.8% during the same time to register NTD71.8bn in FY23, while the net income increased at a CAGR of 5.8% to reach NTD77bn. The local peers Novatek Microelectronics and Elite Material also witnessed similar revenue CAGR of 8.2% and 9.1% respectively over the same period under consideration. However, both the peers fared better with respect to the operating income performance, with Novatek Microelectronics registering a CAGR of 14.5% to reach NTD26.7bn, and Elite Material demonstrating a CAGR of 16.7% to reach NTD7.4bn.

In 3QFY24, the company demonstrated robust revenue growth of 20.0% to NTD131.8bn, with a strong contribution of 54% from the mobile segment, which witnessed a growth of 33% YoY. Smart Edge Platforms, saw an 8% YoY growth and contributed 40% to the sales mix. Gross margins inched upwards by 140 basis points (bps) to 48.8%. Consequently, the operating income surged 33% YoY NTD23.9bn during the quarter. MediaTek anticipates revenue to be around NTD126.5bn –134.5bn in 4QFY24, with gross margins expected to be around 47%±1.5%.

The management has a progressive dividend payout policy with a goal to distribute 10% of leftover profits. Accordingly, the Group has returned high dividends to its shareholders over the recent years, with the average yield depicting over 7% in the last 3 years. The company expects to pay a total dividend of NTD56 per share in FY24, representing a yield of around 3.8%.

Favourable valuation compared to global peers

The stock is trading at a P/E of 22x, based on the estimated FY24 EPS of NTD66, lower than the global peer average of 31.4x, but higher than the 10-year historical average of 18.6x. The company’s local peer, Elite Material is trading at similar levels at a P/E of 21.8x. However, another peer, Novatek Microelectronics is trading at a cheaper valuation of 15.3x. The stock has delivered staggering returns of over 60% in the past one year.

Out of the 22 analysts covering the stock, 12 have a ‘Buy’ recommendation, and 4 gave an ‘Outperform’ rating for an average target price of NTD1,498, suggesting an upside potential of over 2% from the current market price of NTD1,498. The recent run-up in prices means that the stock is close to the target price with limited upside potential, however, any correction in the near term could provide a decent opportunity for investors to evaluate the company.

Overall, MediaTek has maintained a decent financial performance trajectory and has expectations for future growth, especially in areas pertaining to automotive and ASIC computing. This is further demonstrated by analysts’ consensus view where the top-line is expected to rise at a CAGR of 16.7% over the period FY24-26 to NTD713.8bn. However, the company is also faced with stiff competition from rivals such as Qualcomm, which could have an impact on market share. Xiaomi's involvement in the designing of in-house processors brings in another risk and can have a substantial impact on MediaTek and its supply reliance. Geopolitical challenges could also pose problems for the operational stability of the company in the long run.